Tenants’ civil war threatens L+M plan to buy 1,590 apartments

Two Bridges dissenters oppose deal to bring in Section 8 renters

New York /
Jun.June 17, 2022 08:00 AM
L+M's Ron Moelis with Knickerbocker Village, Lawsuit

L+M’s Ron Moelis (L+M, iStock, Illustration by Shea Monahan for the Real Deal)

A developer’s fresh idea to fix up aging Manhattan apartments could be spoiled by some of their tenants.

This winter, L+M Development Partners struck a deal to buy Knickerbocker Village, an 88-year-old affordable housing complex in Two Bridges. Ron Moelis’ firm, one of New York’s largest developers of affordable housing, promised to bring in new federal funding via Section 8 to pay for repairs and keep rents low for existing tenants.

The tenants association came to terms with L+M, but some Knickerbockers aren’t playing ball.

In a lawsuit filed last week, the dissenting tenants aim to block the sale, arguing it would violate the little-known program that has kept rents low across the development’s 12 buildings for decades.

The newly formed Concerned Tenants of Knickerbocker Village are suing the state’s Division of Homes and Community Renewal, which signed the deal with L+M and the official Knickerbocker Village tenants association in February.

Behind the drama — and L+M’s investment strategy — is an unusual rent framework.

For almost 90 years, the state has set rents for Knickerbocker’s 1,590 apartments on a per-room basis, according to the suit. Under L+M’s plan, rent for current tenants would remain $264.34 per room. But the developer would fill units that become vacant at one of three price tiers based on incoming tenants’ income — generating profit for L+M but violating the state’s Private Housing Finance Law, the dissenting tenants claim.

Their suit alleges the new pricing plan would incentivize L+M to replace residents with higher-paying renters, as 40 percent of the units would go to households earning up to 130 percent of the area median income — about $156,000 for a family of three — and another 40 percent to households at 100 percent of AMI. The remaining 20 percent would be for low-income tenants.

Under the housing finance law that governs Knickerbocker Village, there’s no cap to rent increases, but the state sets rents to cover the development’s operational costs. Before the recent uptick in inflation, the state estimated that rents could rise between 8 percent and 12 percent in each of the next two years.

That’s lower than many New Yorkers are facing, but high for Knickerbocker Village. The tenants association concluded that L+M’s deal was the only way to shield existing renters from those hikes.

“Here we are, deciding whether the current residents should take two back-to-back, double-digit rent increases, versus agreeing to a sale with L+M,” said Shi Xing Yang, a leader of the tenants association. “We did not want to displace existing tenants, because a lot of them can’t afford that type of a rent increase, so we continued negotiations to see the best deal we could get for existing tenants.”

The deal they struck called for L+M to freeze rents for existing tenants for three years, then raise them no more than 2.5 percent per year until 2069 — the duration of a property tax abatement granted in 2019.

A spokesperson for L+M said rents have increased 3.1 percent per year for the past two decades on average. The dissenting tenants said the annual increase has been 1.33 percent over 10 years.

The acquisition deal asserts that the project needs at least $50 million in repairs in the next five years. The plan would secure federal Section 8 vouchers for 397 apartments at Knickerbocker — a quarter of all units in the development — allowing L+M to raise rents on those units to $574 per room. Voucher tenants would pay 30 percent of their income as rent, with the remainder of the tab covered by federal subsidy, an average gross rent decrease for those tenants of 65 percent. The infusion would offset the costs for tenants and help pay for the repairs.

Isabel Reyna Torres, a 20-plus-year Knickerbocker resident and a leader of the tenants who are suing, disputes the need for vouchers. She points to the development’s $3 million annual tax abatement, approved by the City Council in 2019, which cut almost 90 percent of its yearly tax bill under the expectation that the money would go toward repairs.

The management had proposed hiking rents by 13 percent to pay for the repairs. Torres says the tax break should free up enough money for that.

“We’re concerned that they’re bringing in these project-based vouchers,” Torres said. “If a place is already affordable, we don’t understand how the project-based vouchers even came into question.”

The answer is that Section 8 adds revenue from Washington, rather than from tenants. L+M is using it to renovate thousands of New York City Housing Authority apartments that previously depended on a less reliable federal subsidy, Section 9.

For her part, Torres also disputes the repair estimates. “They say, ‘Oh, we need all these roofs. We need all these expenses.’ Absolutely not!”

The law doesn’t explicitly state that rents must be assessed at a uniform, per-room basis. But Torres’ side says the rule has been interpreted that way for more than 85 years, and that switching to multiple rent bands would violate that precedent.

In its suit, the group says the current owner, Cherry Green Property Corp., has twice tried to deregulate or restructure Knickerbocker Village to dismantle its rent structure. In 2002, the owner tried to dissolve Knickerbocker Village Incorporated, the ownership corporation, but a judge ruled that the Private Housing Finance Law did not allow that. In 2017, the owner allegedly met with tenants to discuss converting the project to a co-op, but the state issued a cease-and-desist letter.

In their lawsuit, the tenants argue that L+M’s acquisition plan would, in effect, work around Private Housing Finance Law protections without officially exiting the program — deregulation by another name. But the acquisition terms specifically state that Knickerbocker Village will remain governed by the law under supervision of Homes and Community Renewal. A spokesperson for L+M disputes the tenants’ claim.

“Our plan is committing to permanent affordability under continued Homes and Community Renewal supervision,” the spokesperson said. “This is the exact opposite [of deregulation] and an example of being creative with the Knickerbocker Village Tenants Association and Homes and Community Renewal to come up with a solution.”

Two Bridges has become a nexus of anti-development activity. Just a few blocks from Knickerbocker Village, L+M and CIM Group had planned a 72-story, 1,300-unit development that spent years in litigation from community activists who argued it and two other projects needed City Council approval. The Chetrit Group purchased the site for $78 million in April.

Prior to taking office, the district’s new Council member, Christopher Marte, opposed the Soho rezoning  and a plan to replace a community garden with 123 units of affordable housing for seniors.

“I don’t trust L&M as an owner,” Marte told the Village Sun.

Homes and Community Renewal declined to comment, citing pending litigation.

The tenants fighting the L+M deal say the duly elected tenants association, which dropped its own lawsuit upon coming to terms with L+M, has failed to properly inform and represent the residents. It conducted its own door-knocking campaign and reported that more than half of residents didn’t know the sale was happening.

“That is unacceptable and that is a disgrace to the governor, to the Division of Homes and Community Renewal, to any elected official that would back this deal,” Torres said.

The official tenants association says it did all it could to contact residents, and that while the deal isn’t all they wanted, it beat the alternatives.

“My Chinese isn’t so great, but we tried to explain the best that we can that we’re protecting them,” said Yang.

Christina Zhang, another tenants association officer, said she has asked Torres how her group would prevent double-digit rent increases if it stops the sale. “What are they going to pull out of the hat?”





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